7/29/2009 @ 1:30PM

Where To Cash In On Real Estate

Across America, tall towers of unsold condos stand like monuments of another age. In many markets, sales activity has virtually stalled, with sellers enduring a sales drought that’s lasted longer than a year. That means lots of opportunity for buyers.

That’s the case in Lake Tahoe, Calif., home to two of our best places to cash in on the condo market. In Olympic Village, Calif., and Tahoe City, Calif., condos have been sitting on the market for an average of 461 and 413 days, respectively. Also feeling the pain are Fisher Island, Fla., Bal Harbour, Fla., and Key Biscayne, Fla., where buyers have a tremendous opportunity to get a cut-rate condo.

Condos offer a particularly attractive bargain because during the boom they were in demand and subsequently overbuilt by developers who overestimated market demand. According to the National Association of Home Builders, at the time the condos built in 2005 and 2006 came onto the market, they ballooned supply to 38 months in Seattle, 21 months in Minneapolis and 14 months in Boston. Six months of inventory is considered a healthy market; a 400% increase in condo construction between 1996 and 2007, according to NAHB, created massive backlog.

Behind The Numbers

To determine which areas offered the best deals, we used data from Altos Research, a Mountain View, Calif., real estate research firm. The slowest sales rates for condos, and therefore the biggest opportunities for deals, are in the luxury sector, which lies outside of the $729,000 conforming loan limits for Freddie Mac, Fannie Mae and the Federal Housing Authority. As a result, we looked at every condo market in the country where properties do not qualify for government-sponsored loans. Defining a market at the zip code level, there were 150 neighborhoods that Forbes evaluated. We excluded any market where there were fewer than 10 active listings. The markets that made our list were all in the top quartile.

During the boom, luxury condos were the most profitable to develop; construction is relatively quick and buyers were willing to pay top dollar for downtown or beachfront locations. Rampant condo building continued to occur after 2005, when even the rate of single-family home building had tapered off, according to the NAHB. With the glut of supply, and sales down by 3% over the past year, according to the National Association of Realtors (single-family sales are flat), developers are rapidly approaching a tough call: sell for larger discounts or hold on?

“What’s the staying power of developers and banks? It’s not forever,” says Jonathan Miller, president of Miller Samuel, a Manhattan-based appraisal. “Can they last 10 years or five years? I doubt it. At some point you’re going to see talk about drastic repricing. It’s the situation in most metro areas that saw luxury condo development.”

That’s bad news for prices in places like Key Biscayne, Fla., New York’s Upper West Side and Bal Harbour, Fla. where large swaths of new development projects sit unsold. In those markets, condos are sitting on the market for an average of 284 days, 273 days and 285 days, respectively.

Because they’re easy to build, condos tend to be what’s known as an elastic product. Prices and construction go up quickly in good times and down sharply in bad. Before this most recent housing collapse, America had never experienced a national, multi-year decline in prices, but evidence from past bubbles that affected housing suggest that the highest end will feel the largest dollar value decrease.

Gone are the days when condos would sell out before they were finished. Now it’s the one segment where the sales rate hasn’t picked up in year-over-year terms, according to the NAR. It’s not just new buildings with an inventory glut. The 234-unit Trump building at 200 Riverside Dr. on New York’s Upper West Side, completed in 1999, has 25 sales listings, and 12 rental listings, according to StreetEasy, a New York data firm. That’s 16% of inventory for sale or rent.

In Fisher Island, Fla., things are worse. Even though the top end of the market has a median price tag of $5.3 million, the average condo has been on the market for 350 days. Some projects, like the Palazzo Del Sol, started in March of 2007, have yet to come onto the market. So if developer Fisher Island Holdings gets the $300 million project finished and delivers 47 condominiums onto the market, its unlikely any will find buyers. Based on the sales rate, there is 20 months of inventory, based on data from Trulia.com.

The best way to get a deal on properties in these markets is either to pay with cash or to put down enough of a down payment that you can qualify for government sponsored loans. When you look at how long properties are sitting on the market in some of these neighborhoods, you start to realize that any offer (even a lowball one) may be an offer the seller can’t refuse.